Statistics  |  OCT 2002

If Beta Doesn’t Work, What Does? by William G.S. Brown, Ph.D.

If Beta Doesn’t Work, What Does? by William G.S. Brown, Ph.D. Beta not doing it for you? Try the price regression line. Conventional wisdom says that a stock (or stock fund) having a beta close to 1.0 will follow the market. Is that true? This piece of common knowledge can easily be verified by going to a stock or fund screen and searching for investments with beta greater than 0.99 but less than 1.01 and a five-year growth between -90% and +200%. In Figure 1 you will find the unusual values I came up with when I used the stock screener at www.hoovers.com. If a stock with a beta of 1.00 followed the market, then it would be impossible for one stock to gain 48.12% while another loses 50.64% when they both have a beta of 1.00. This clearly shows that beta is not a good indicator of how well a stock follows the market.

by William G.S. Brown, Ph.D.